1. Consumption the amount households spend on goods & services
“disposable income” is the income left over after direct taxation plus state benefits
The tendency to spend an extra £1 earned is called the “marginal propensity to consume” (MPC) – if we spend £0.70 of each extra £1 we earn, MPC is 0.7 (the rest is saved )

2. A Simple 2-Sector Model (Firms and Households)
Wages, Rent, Dividends (Income)
Consumption Spending (Expenditure)
Goods & Services
(Value of Output)
Labour, Land, Capital
The UK economy - performance and policies

3. We don’t spend everything we receive…
MPC – Marginal Propensity to Consume
How much out of each extra £1 we earn do we spend?
If I earn £1000 more this year and MPC is 0.7, how much of that do I spend? (the rest is saved)
MPC = Δ C = Δ Consumption
ΔY Δ Income
What proportion of increased income results in increased consumption

4. Influences on Consumption
Real
Incomes
Cost & Availability of Credit
Wealth
Influences on Consumption
Confidence
Direct Taxes
Savings

5. Saving the disposable income which is not spent
as income rises, both the nominal amount saved and the ‘marginal propensity to save’ tend to increase
eg. a person with a disposable income of £1000/month may save £100 (10%) whereas a person with disposable income of £4000/month may save £1000 (35%)

6. Influences on Saving Real Incomes Interest Rates Gov’t Policies
Culture & Attitudes

7. How much do we save? MPS – Marginal Propensity to Save
MPS = Δ S = Δ Savings
ΔY Δ Income
Or…
MPS = 1 - MPC

8. Saving vs. Savings Flow versus Stock Remember income versus wealth?
‘Saving’ is the amount not spent
‘Savings’ is the total accumulated pot of money that has not been spent

9. A little something extra to think about: The Paradox of Thrift
According to Keynes, although saving is required for long term growth (investment), planned saving can in fact lead to a decrease in investment. The immediate effect of an increased desire to save is a fall in consumption. This reduces the incomes of producers. This could lead to a fall in national income, decreasing the amount available to save & thus invest.

10. MPC and APC
How much of a household’s income is spent is called the average propensity to consume
APC =
The marginal propensity to consume measures the proportion of an increase in income that is spent
MPC =
Consumption
Income
Change in consumption
Change in income
The blue line represents consumption if all income is spent
The red line is actual consumption, showing that with no income, households still spend some money, drawing down on saving or borrowing
The slope of the red line is the marginal propensity to consume, g/h, or b which shows as income increases, so does consumption, but not by as much

11. Example
Income (Y)
Consumption (C)
Saving (S) 50 60
-10
100 95 5
150
125 25
200
250
170 80
300
185
115
What is the MPC as income rises from 150 to 200? How about 250 and 300?
What is the APC at an income of 200 and 300?
All else equal (ceteris paribus), as income increases both consumption and saving increase
The higher the income, the lower the APC (those on higher incomes can afford to save)
The MPC may also fall as incomes rise